Prepare for QE3, US economists warn

SIGN OF THE TIMES:As US jobs growth and Treasury yields are falling, more monetary easing is widely expected, but some Fed officials are questioning if such a move is wise

Bloomberg

Pacific Investment Management Co’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc say investors should prepare for additional bond purchases by the US Federal Reserve, known as QE3, to combat a slowing US economy.

A decision to buy more debt is “getting closer,” Gross, who runs the world’s largest mutual fund, said on Twitter on Tuesday. Hatzius, the chief economist at New York-based Goldman Sachs, predicted in a report on the same day that the Fed would announce additional monetary easing when it meets next month.

Prospects for central bank asset purchases increased after a US Labor Department report on Friday last week showed US employers added 115,000 jobs last month, the smallest gain in six months. Europe’s debt crisis is threatening to slow global growth. Ten-year US Treasury yields fell to 1.81 percent on Tuesday, approaching the record low of 1.67 percent set on Sept. 23 last year.

“In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policy makers,” Hatzius said. “We have stuck with our forecast of some additional monetary easing” at the Fed’s policy meeting on June 19 to June 20.

The US central bank bought US$2.3 trillion of bonds in two rounds of so-called quantitative easing, known as QE1 and QE2, from December 2008 to June last year. The Fed is also replacing US$400 billion of short-term Treasuries in its holdings with longer-term debt to keep borrowing costs down, under a program scheduled to end next month.

Policymakers have pledged to keep the target for overnight bank lending as low as zero until at least late 2014.

Two Fed officials have questioned whether additional easing would work.

Fed Bank of Dallas President Richard Fisher said on Tuesday that a drop in equity prices is no reason for the central bank to intervene.

“Markets are manic depressive, they come and go,” Fisher said when asked if slumping markets and slower-than-expected employment gains had changed his outlook for Fed policy.

“The key to success here is not further monetary accommodation,” he added.

The Standard & Poor’s 500 Index fell to its lowest level in two months on Tuesday.

Fed Bank of Richmond President Jeffrey Lacker said on Monday that much of US unemployment results from structural weaknesses, such as inadequate training, that cannot be fixed by Fed stimulus. The US jobless rate of 8.1 percent is the lowest in three years.

“Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated,” Lacker said.

“But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up,” he added.

Lacker votes on monetary policy this year, while Fisher does not.

The US economy is “dreary,” Hatzius said.

GDP growth slowed to an annual rate of 2.2 percent in the first quarter from 3 percent in the prior three months, the US Commerce Department reported on April 27.

Politicians in Greece struggled to form a new government, raising concern the nation would abandon the euro as its currency.

Low government rates have led investors to look for more attractive yields outside the sovereign-bond market.

“Risk markets need more ammo if they are to stay up,” Gross, who is based in Newport Beach, California, said on Twitter.